Sunday, October 5, 2008

Germany clinches bank rescue deal

Germany clinches bank rescue deal

Hypo's problems should have been revealed earlier, a minister says
Germany's finance ministry has agreed a 50bn euro ($70bn; £40bn) plan to save one of the country's biggest banks.

The deal, reached with private banks, to save Hypo Real Estate is worth 15m euros more than the first rescue attempt, which fell apart on Saturday.

Germany earlier announced an unlimited guarantee for all private savings, a move followed later by Denmark.

Meanwhile, French giant BNP Paribas has confirmed it has agreed to take over parts of ailing Fortis bank.

The Icelandic government, meanwhile, has been working through the night to try to shore up its entire banking system.

The country's banks have now agreed measures to stabilise its financial system, where last week the currency fell by a fifth against the dollar.

We tell all savings account holders that your deposits are safe. The federal government assures it

Angela Merkel

Germany's finance ministry said that with the "mutually agreed solution" Hypo Real Estate would be stabilised, and "Germany strengthened as a place to conduct finance in difficult times".

Earlier, German Chancellor Angela Merkel moved to reassure German savers that all their deposits would be safe.

Similar unilateral guarantees issued by the Irish and Greek governments last week were criticised in Berlin and other European capitals.

But after an emergency meeting with the central bank earlier, Ms Merkel said: "We will not allow the distress of one financial institution to distress the entire system. For that reason, we are working hard to secure Hypo Real Estate.

"We tell all savings account holders that your deposits are safe. The federal government assures it."

BBC business editor Robert Peston said the UK Treasury was attempting to clarify the details of Germany's guarantee to savers.

If the move does amount to a 100% government guarantee of all German savings deposits, other EU states - including the UK - would have to follow suit, says our correspondent.

The British chancellor, Alistair Darling, has said he is ready to take "pretty big steps that we wouldn't take in ordinary times" to assist the British economy.

Banks strained

On Saturday, leaders of Europe's four biggest economies - Germany, France, Britain and Italy - decided against a co-ordinated US-style bank bail-out, while vowing to stabilise markets.

The problems of Hypo Real Estate have put further strain on other financial institutions, which are struggling against a crisis of confidence in the global financial system.

Ms Merkel said bank managers had to be held accountable

Late on Sunday, French bank BNP Paribas confirmed that it had agreed to buy 75% of Belgium and Luxembourg holdings of the giant Fortis financial group, creating one of Europe's biggest savings banks.

The governments of Belgium and Luxembourg will in return take a minority stake in BNP Paribas.

The Dutch arm of Fortis has been nationalised by the Netherlands government.

Iceland's government is also reported to be considering a $14bn (£8bn) injection into the banking system, having bailed out the country's third largest bank, Glitnir, last week.


Ms Merkel said that managers at financial institutions should be held accountable for "irresponsible behaviour".

Finance Minister Peer Steinbrueck accused Hypo Real Estate's managers of misleading the government over the true extent of bank's troubles.

European governments are as dazed and confused by the mayhem in the global banking system as most of the rest of us

Robert Peston
BBC business editor

Peston's view: Lost in translation
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Iceland shores up economy
But he said Berlin would do all it could to prevent the bank's collapse, to avoid "incalculably large" damage to Germany and financial services providers in Europe.

The BBC's Tristana Moore in Berlin said that the German move would be an undoubted relief for investors and sends an important message to the German public that banks will not be allowed to go under.

Analysts say the question remains as to how the markets will react when they open on Monday morning.

The initial signs were not encouraging as share-trading in Australia and New Zealand opened in decline.

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